It has been 17 long years since the liberalization of the economy. But despite all the progress that has occurred in the equity markets, from the dematerialization of shares to T+2 settlement, from electronic trading to the introduction of futures and
options, Indian households still invest the same proportion of the country’s gross domestic product (GDP) in shares, mutual funds and debentures as they did in 1990-91. Data released by the Reserve Bank of India show that the gross financial savings of the household sector in shares and debentures amounted to 1.6% of GDP in 2007-08, up from 1.2% in 2006-07. But that percentage was 1.6% as far back as 1990-91, although it’s a big improvement from the 0% of GDP they put into the capital market in 2003-04.
If we compute the amount investors have put into the capital market as a share of their gross financial savings rather than as a share of GDP, then that percentage has improved from 0.1% in 2003-04 to 10.5% in 2007-08, due to the bull market of the last few years. Even so, investors had more appetite for risk in the early 1990s. Investment in shares, debentures and mutual funds amounted to 14.3% of gross financial savings in 1990-91, reaching a peak of 23.3% of gross financial savings and 2.6% of GDP in 1991-92. That love affair with the capital markets was largely on account of the Unit Trust of India (UTI) and investors had put in as much as 13.3% of their financial savings into units in 1991-92. Other mutual funds have taken over the mantle of UTI and they accounted for 7.7% of the gross financial savings of households last fiscal year, up from 5.2% in the previous year. But the share of direct investment by households in the shares and debentures of the corporate sector was much higher in the early 1990s (8.4% in 1992-93) compared with 2.7% in FY08.
The proportion of financial savings of households invested in insurance funds, however, has been going up and this has provided another avenue for money being channelled into the stock markets, thanks to unit-linked insurance policies. The percentage of household financial savings in insurance policies went up from 14% in 2005-06 to 17.5%, or 2.7% of GDP, in the last fiscal year.
Last year also saw an outflow of household investment from government securities and small savings, because of the unattractive rates of interest on these instruments. Investment in pension and provident funds, which used to be 2.8% of GDP in 1999-2000, was down to just 1.3% of GDP last year.
The biggest winners in all this have been banks, which accounted for 55.3% of gross financial savings of households in 2007-08. That share used to be 35.5% in 2002-03, which means that most households have preferred to invest their rising incomes during the last few years in bank deposits rather than participate in the bull market. In 1991-92, the percentage of financial savings put into bank deposits was a mere 21.3%. Nor was this just a one-year aberration — the share of bank deposits in household savings was below 30% in most years between 1990-91 and 1996-97.
With the return of the bear market, risk aversion will increase and the current year’s data is likely to show a much lower proportion being invested in the capital markets, increasing their dependence on foreign funds.
Ballarpur Industries posts good results, but markets unimpressed
Profit has increased for paper maker Ballarpur Industries Ltd (Bilt) at an average rate of about 25% in the past three years. The firm announced annual results late last week — another year of healthy profit growth.
According to a presentation made to investors, Bilt expects earnings per share to grow at more than 30% in the next two years, by which time the company would have also completed a major expansion drive. What’s more, the company has unlocked value from the commodity part of its business by hiving off three of its Indian units into an overseas subsidiary. This subsidiary also houses its acquisition in Malaysia, Sabah Forest Industries Sdn Bhd. Bilt offered 21% in this subsidiary to private equity investors at a valuation that the company claims is double of what it would have got in India. Some of these proceeds were used to restructure the Indian firm’s equity capital. Bilt has reduced its equity capital by 40% through a compulsory buy-back of shares from all shareholders. This will result in better return ratios for Indian shareholders.
Despite all this, Bilt shares continue to languish at a valuation of just seven times trailing earnings. Based on the company’s target for financial year 2009-10, the valuation works out to only four times earnings. Bilt’s share price performance is just a reflection of the general apathy for the paper sector among Indian investors. Although demand for paper has grown at a healthy rate, and the share of organized and large players such as Bilt has increased, investors continue to be circumspect about the sector. The key concern is the high capital intensity of the business, and the continued increase in the cost of setting up capacity. The return on capital employed of these companies, such as the 12% reported by Bilt, is hardly exciting.
But it must be noted that international peers with integrated paper manufacturing capability have single-digit return on capital employed. Indian manufacturers are in a much better place, thanks largely to better profit margins, which are 10-15 percentage points higher than their international peers.
What’s more, the Indian market is expected to continue growing at a healthy pace, partly because of under-penetration in segments such as the high-margin tissue and hygiene papers. According to an analyst, valuations of the paper sector are close to a bottom. But the risk with going out and buying these stocks would be that the majority may continue to have a bearish view for a long time to come.
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